Talking Heads: Caleb Roope, The Pacific Companies

10 min read

Rural vs. Urban Development  

The Pacific Companies, headquartered in the bucolic  community of Eagle, Idaho, has developed 10,000 units of multifamily housing over its 20-year existence—90 percent of it affordable—in some of the remotest parts of the western United States as well as in its largest urban centers.

The company started out as a rural builder throughout the West. Then in 2008, CEO Caleb Roope expanded his focus into California’s urban core, where the need for affordable housing was even greater and the projects larger and more lucrative.

Today, 40 percent of the company’s portfolio is rural, 40 percent urban and 20 percent suburban. The bulk of the newer properties are located in California’s larger cities, but Roope still enjoys developing rural projects.

Tax Credit Advisor sat down with Roope to talk about the lessons and challenges he has learned developing affordable housing in rural and urban markets and current trends he is encountering.

Tax Credit Advisor: You’re based in Idaho, but a significant portion of your properties are located in California. Why is that? Are there not as many people in need of affordable housing in rural areas?

Caleb Roope: My roots are in California. Before I founded the company, I was in the affordable housing space for eight years. This included summers when I came home from college and spent time in construction working on affordable housing projects. I was born in California, raised there, went to school there, and started my early career there. I had a good understanding of California and everything going on there. I moved to Idaho in 1998, but I never really left California in terms of our business activities, in fact we have only increased them. As I developed all over the western U.S., what I kept coming back to was that our California properties performed better. California has a greater diversity of economic activity and a larger population base, so those properties always weathered storms better. The need for housing, especially in urban areas, is much greater compared to any of the rural markets we work in. The demand and supply ratio is enormously high and we can’t build enough housing in urban areas. There are people in rural areas who need affordable housing, just not as many.

TCA: How do you find new projects in rural states? Must you prepare any differently for a housing project in Sheridan, WY compared to Sacramento, CA?

CR: It’s much easier to find properties in rural areas and you do need to prepare differently. In a rural market, I can come to a community, get a zoning map or logon to Google Earth, and quickly determine where vacant, zoned properties are located. When I go to an urban area, there’s a significant political dynamic that needs to be dealt with. I have to talk with the city council member who represents the district or go through some other complicated drill. In rural markets, the planning process has fewer steps which simplifies the execution. The projects are smaller, but easier to find. It takes half the time to get entitlements. Land-use approvals and building permits are approved more quickly. Local political figures and leaders are more accessible. Regulations are less complex. This is a generalization and there are always exceptions.

TCA: Is it easier or harder to get Low Income Housing Tax Credits in rural states? Are there certain amenities or design features that you must have in rural projects to help secure a LIHTC allocation?

CR: It is easier, at least in the western half of the country. We tend to have higher application-to-award ratios in rural states, compared to California. The amenities and design features are not drastically different from urban areas. You need to be sensitive to the size of your project. That’s a major element. In rural areas, there’s often less public transportation and so we try to focus on situating sites within walking distance or a short drive to the amenities that people need – schools, parks, grocery stores. Rural projects tend to be garden-style, two- and three-stories. Four to eight units is a typical building size. They fit in more with the rural character, and we try to avoid modern architecture. The design is more traditional craftsman that blends into the community.

TCA: Competition for LIHTC in California is fierce. How do you fare so well?

CR: I think it’s our history of working there for one. California isn’t a state where many developers from outside states come into. It’s pretty rare. I would say on the nine percent credit side, less than five percent of the credits in any given year go to out-of-state developers. Although we’re out of state, we’re really not, in a sense that our company roots are there and we still maintain offices in California. We also have good diversity in the types of projects we do. We are not married to one project type. We do family housing, senior housing, supportive housing, special needs housing. New construction and acquisition/rehab. So having a diverse offering has contributed to our success. And on the financing side, we do nine percent and four percent credits. We believe we can go into a project with a lot of options and be in a position to compete for credits where it makes the most sense. Having said that, we do get beat out for credits on a regular basis.

TCA: California has a reputation for not being very supportive of affordable housing. What must developers do to overcome that obstacle?

CR: There have been recent discussions about a legislative deal that includes accelerated approvals for new housing projects and new funding sources for affordable housing. So I don’t concur that the legislature or governor haven’t been supportive of affordable housing. The legislature has supported numerous proposals. The governor has been indifferent or more focused on other things, such as the high-speed rail, infrastructure, cap and trade issues and balancing the state’s budget. Even at the local level, it’s hit and miss. But there are a lot of urban communities that are very supportive of affordable housing and try and pass laws and create funding mechanisms to help make it work.

TCA: Are construction costs any less in rural markets? Is it more challenging to find skilled and unskilled labor?

CR: Construction costs are generally less because of the product that is being built. But it can also go in the other direction. If you are in a market that is experiencing an energy boom or mining boom or other economic activity that is sucking the labor force in that area, it can get really bad. When mining takes off in northern Nevada, it can be terrible to execute in those markets because you can’t find the labor. The framing companies, the plumbing companies, they lose their guys to the mines, because the mines pay more. Rural markets don’t have a robust subcontractor base. So you are trying to pull from other markets to build your projects and when those other markets are busy it gets harder to pull from them. It’s a problem now. There’s a massive shortage of skilled labor, no matter where you are.

TCA: Do you manage your properties in-house or do you utilize third-party property managers? Are there any differences managing rural properties versus urban properties?

CR: We have 25 management companies that oversee our portfolio. That’s a lot, but necessary because we have properties in Los Angeles’ urban core and in the remotest parts of Wyoming and Alaska. At rural properties, you must pay close attention to turnover and maintain a solid wait list to move people into vacated units. In urban areas, there’s such a high demand for housing that you can fill vacancies with little effort or advertising. But in rural areas, you have to pay more attention to turnover and work more to fill those units up. With any property, you must employ good staff, maintenance personnel, etc. Retaining talent in rural areas can be tough. A goodonsite manager looks for opportunities to get promoted and make more money. You have to pay attention to those details, so that you don’t lose them. Weather can play a factor too. In California, where the weather is better, you have fewer issues to worry about from a management perspective. Rural areas are rural for a reason. They lack amenities and experience harsher weather, so climatic issues can be an issue.

TCA: How do you manage that many vendors in-house?

CR: We have a team of five people here in Idaho who oversee all of the management companies. Each person picks a region and oversees certain management companies. Three-quarters of the properties are on auto-pilot. The management company is great. The market is great. The property is performing well. The other quarter is where we spend our time dealing with problems associated with quality, occupancy, cost-containment or random things that happen, like fires and floods. We use a sophisticated software system called Fusion, which is Boston Capital’s proprietary software that they offer to developers. We get a lot of different financial statements, as you can imagine from 25 different property management companies. But we can input all of that information into the system, which consolidates everything and converts it into a standardized report. The properties that have chronic problems, we are visiting them on a regular basis, talking to the management company, making changes, to bring the property into a state that we are satisfied with.

TCA: What’s the biggest challenge that your company is facing, and how are you overcoming that challenge?

CR: We are experiencing the same two challenges as everyone else: the unstable tax credit market and rising construction costs fueled primarily by labor shortages. It has been especially difficult for large urban deals that might be $40 to $50 million in equity. There are only a dozen corporate investors nationwide that will do a project of that size. We are struggling to find equity for larger projects but equity pricing is down and unless you have a nine percent deal that you can afford to take 90 or 92 cents, you have challenges. We have tried to register our projects with one syndicator and let them go out and talk to potential investors, rather than having multiple syndicators chasing the same deal with the same investors. On the cost side, we are getting to know our subcontractors better than we ever have. We are asking them where they want to work and where they are most active, and then show them our pipeline and find projects that might interest them. We pay our subcontractors more quickly. We have a discount program where we pay subcontractors within 48 hours for a discount on their invoice. Many take advantage of that. We try to be as accommodating as possible with the current labor force to get them focused on our work.

TCA: What’s the best move that The Pacific Companies has made recently that other developers may learn from?

CR: What has helped immensely – and this is not a recent move but one we made a long time ago – is having vertical integration and being a general contractor. Construction represents a meaningful source of cash flow for our business. We don’t have to ask investors to fund our developer fees during construction, because we already have a revenue source. We can defer our developer fees until the end of the project, which makes investors more comfortable and attracts them to our work. We get identified as a good sponsor that way. Having vertical integration also gives us direct connections with subcontractors and is one of the things that really saved us when the recession happened and allowed us to continue executing on deals.

Story Contact:
Caleb Roope
CEO, The Pacific Companies

Darryl Hicks is vice president, communications for the National Reverse Mortgage Lenders Association and a 24-year veteran of associations managed by Dworbell, Inc., the management company of NH&RA.